OCBC - Unlikely to be Distracted by Acquisition Down South

Date: 05/09/2019

Source  :  UOB KayHian
Stock  :  OCBC Bank       Price Target  :  14.48      |      Price Call  :  BUY
        Last Price  :  8.81      |      Upside/Downside  :  +5.67 (64.36%)

  • We see higher probability of OCBC (SGX:O39) emphasising on its north-bound expansion to increase its 20% stake in Bank of Ningbo (market cap: S$25.6b), as and when allowed to do so by the authorities in China. It will also deploy capital to support expansion to double PBT from GBA to S$1b by 2023.
  • Bank Permata is smaller than OCBC NISP and has a low ROE of 5.9%. It may not be worth the effort to acquire Bank Permata due to its chequered history.
  • Maintain BUY. Target price: S$14.48.

What’s New

  • Speculation has surfaced that Oversea-Chinese Banking Corp (SGX:O39) is mulling an acquisition of 89.2% of Bank Permata from Standard Chartered Bank (SCB) and Astra International. Both shareholders have equal stake of 44.6% in Bank Permata.

Standard Chartered Bank seeking to divest Bank Permata.

  • Standard Chartered Bank has embarked on a three-year strategic plan to double ROE to above 10% by 2021. It has identified and would restructure its operations in four non-performing markets, namely India, Indonesia, South Korea and the UAE.
  • Standard Chartered Bank has classified its 45% stake in Bank Permata as non-core. CEO Bill Winters has said that Standard Chartered Bank is actively working on finding a solution for Bank Permata since Oct 18. Divestment of Bank Permata would generate capital to support share buyback and higher dividends.

A chequered history.

  • In 2016, Bank Permata racked up losses of Rp6,483b due to allowance for impairment losses of Rp12.2t. NPL ratio deteriorated from 2.7% in end-15 to 8.8% in end-16 (NPL balance increased more than 3-fold due to exposures to manufacturing, wholesale & retail, mining, agriculture and construction sectors). Indonesia experienced slower growth at 5.0%, buffeted by weak commodity prices and rupiah volatility. Corporate loans for working capital and investments shrank 26% and 35% respectively. The bank liquidated part of the NPL portfolio and wrote-off Rp4,455b of NPLs. The bank had to be recapitalised by raising Rp5.5t through a 249-for-283 rights issue in Jun 16.

Uncertainties relating to auto financing.

  • Bank Permata does not have a multi-finance company. It relies on collaboration with Astra’s multi-finance companies, such as PT Astra Sedaya Finance (ASF), PT Federal International Finance (FIF) and PT Toyota Astra Financial Services (TAF), to provide financing for automobiles and other durable goods. Outstanding balance for indirect consumer finance was Rp10.7t as of Dec 18, which accounted for 10.8% of total loans.
  • It is uncertain if Astra would continue the collaboration with Bank Permata when it is no longer a shareholder.

Stock Impact

Acquisition of Bank Permata could enhance scale in Indonesia.

  • Bank Permata is the 11th largest bank in Indonesia with 323 branches across 62 cities and total assets of Rpt153.9t (S$15.1b) and RWA of Rp95.8t (S$9.4b). Acquisition of Bank Permata would increase OCBC’s total assets and RWA in Indonesia by 3.9% and 4.7% respectively. The potential acquisition would propel OCBC to be the fifth-largest bank in Indonesia.

But valuation is stretched.

  • The stock trades at Rp1,005 with market cap of S$2.8b. Its P/B is only 1.21x (OCBC NISP: 0.75x) due to low ROE of 5.9% (OCBC NISP: 11.6%) and NIM of 3.5% (OCBC NISP: 4.1%).

One of a few possible scenarios.

  • OCBC has various options for inorganic growth and there are various potential bidders for Bank Permata:
    • Various options for inorganic expansion. OCBC could invest to further expand in the Greater Bay Area (GBA). Management targets to double PBT from GBA to S$1b by 2023, which represents a 5-year CAGR of 11%. OCBC could also increase its stake in Bank of Ningbo (BON) beyond its current 20% if China liberalises its banking sector to allow for greater foreign participation.
    • Various suitors conducting due diligence. According to press reports, Bank Mandiri was exploring the feasibility to acquire Bank Permata as early as Mar 19. In the past, Bank Panin, CIMB, Maybank and UOB (SGX:U11) have also considered bidding for Bank Permata.

Earnings Revision / Risk

  • We maintain our earnings forecasts.

Valuation / Recommendation

  • Maintain BUY. Our target price of S$14.48 is based on 1.40x 2019F P/B, derived from the Gordon Growth Model (ROE: 10.8%, COE: 8.00% (beta: 1.1x), growth: 1.0%).

Share Price Catalyst

  • Expansion in China’s Greater Bay Area.
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.

Source: UOB Kay Hian Research - 5 Sep 2019

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